TAJ receives first connected party filings, audits begin
Local companies for the first time have submitted returns which disclose their connected parties to Tax Administration Jamaica (TAJ) a requirement under the new transfer pricing law which aims to reduce revenue leakage.
The rules were adjusted under an amendment to the Income Tax Act and implemented last year.
Companies were required to file their first connected party returns by March 15 of this year, TAJ director of communications Meris Haughton said on Friday.
"Our auditors are now doing the audits of these returns," she said.
TAJ is being assisted with the task by the Organisation for Economic Cooperation and Development, which is providing technical support.
The transfer-pricing legislation is meant to curtail tax avoidance and is particularly focused on cross-border transactions of large corporations and how those dealings are assessed for taxes. It places the onus on taxpayers who earn more than $500 million in a financial year to state in their annual returns the arm's length consideration for connected transactions.
The Jamaican law is based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
"Our aim is to ensure that the country is protected, in terms of revenue leakage from that angle," Haughton said.
For many local companies and conglomerates, their parent either reside in another jurisdiction, where income tax requirements are less, or have overseas associates to whom payments of management fees, research and development, and general and administrative expenses are usually deductible for income tax purposes.
These deductions, however, must be made at arm's length rates and the relevant withholding taxes deducted.
Jamaican government auditors will be checking to ensure that the arm's length consideration or transfer pricing declared by the taxpayer a comparable to a transaction with an independent party.
The law places the burden on the tax filer to prove that the transaction is arm's length, using a method of calculation that satisfies the tax commissioner.
As previously noted by auditing firm KPMG, the legislation applies to transactions even between unconnected parties if the non-Jamaican entity is in a tax haven.
In addition, it takes into account the use of captive insurance companies, that is, insurance companies established by a parent group with the specific objective of covering the risks to which the parent is exposed.
The law proposes fines of up to $2 million or imprisonment up to a year for breaches.